Lecture 9 Products and Services; Prepared by Zaved Mannan 1 | P a g e
Products and Services
At the completion of this lecture, you should be able to:
• explain the characteristics of products;
• gain awareness of the various marketing strategies available for various
product levels and classifications;
• understand how products can be differentiated;
• explain the distinctive nature of services;
• gain awareness of the marketing strategies available to service firms;
• understand the importance of service quality;
• appreciate the main risks in developing new products;
• identify the organizational structure used in managing new product
• describe the new product development process.
This topic examines the essential characteristics of both products and services and
looks at strategies available to marketers in managing each. Increasingly the lines
between products and services are becoming blurred. As firms try to differentiate
Textbook: Kotler et al., Chapter 12 and Chapter 20
Reading 9.1: Cooper, R. G. (1990). From experience: The invisible success factors
in a product innovation. Journal of Product Innovation. 16, 115-153.
Lecture 9 Products and Services; Prepared by Zaved Mannan 2 | P a g e
themselves and increase the value offering to customers more and more products
are being offered with services attached. For example a new car that comes with a
5 year service warranty is offering the consumer a blend of product and service.
The final part of this lecture will look at new product and service development. A
critical task that marketing managers have to perform is ensuring that products and
services continue to meet the needs of the target market. Due to shortening
product life cycles and changes in customer preferences, it is essential that
marketers continue to develop new products and services which satisfy unmet
needs in both domestic and global markets.
As Kotler et al. (2009, p. 308) point out, broadly a product is anything that can be
offered to a market to satisfy a need or want. Thus under this definition it can
include physical goods, services, political message, experiences, events, persons,
places, properties, organizations, information, and ideas.
When planning marketing strategies for products, marketers need to be aware that
a product has a number of levels. Each level impacts on the value and appeal of the
product to customers.
Kotler et al. (2009, p. 342) outline five levels in the customer value hierarchy. We
will use a bottle of red wine to demonstrate the levels:
1. The core benefit of the wine could be relaxation, enjoyment or even
potential health benefits if it is red wine.
2. The basic product is the wine itself – the liquid.
3. The actual (or expected) product would be the wine and the bottle. It
would include the brand and any associations you would have with the brand
in relation to quality, value, taste, etc. other aspects of the actual product
include the size and shape of the bottle, whether it has a cork or is a screw
top, the label and the logo.
4. The augmented product is any additional value or benefits the wine
provides. For example Banrock Station wines donate a portion from every
sale to environmental causes such as rehabilitation of wetland habitats. In
this case the wine is providing value in excess of what you would normally
expect from a bottle of wine.
5. The potential product represents the possible new ways the company could
extend its offering. For example you could join a Banrock Station brand
community and become involved in environmental initiatives associated with
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Marketers can vary any of the offerings at any of the product levels aiming to ad
value and improve customer satisfaction.
Another approach to designing marketing strategies for products uses product
classification. Three methods for classifying products are durability, tangibility or
use (Consumer and industrial).
Non-durable goods include products such as food and drink. Strategies tend to
focus on frequent sales, wide distribution, small profit margins and heavy
advertising. Durable goods such as furniture, cars and houses are longer lasting
and generally require a larger outlay of money. Perhaps selling and high service
levels are usually required in marketing these types of goods.
Intangible goods such as services will be deal with in more detail later but in
general they rely heavily on trust, adaptability and quality.
Products can also be classified based on whether they are used by consumers or
industry. Read Kotler et al. (2009), pp. 311-312) for a full overview of the
approaches of marketing goods on the basis of use.
Products vary in their potential for differentiation. Commodities such as iron, steel,
wheat and sugar are hard to differentiate. Products with lots of features such as
cars or household appliances tend to be easier to differentiate. Marketers can look
at varying form, features, level of customization, performance quality, conformance
quality, durability, reliability, style and design in order to differentiate their products
from their competitors. Kotler et al. (2009, pp. 312-319) provide a comprehensive
outline of the various options. They also explain how the key to adding value and
differentiating your products may be in the addition of services such as ease of
ordering, delivery, installation, customer training and consulting, maintenance and
repair, or in reducing the risk in the purchase through a guaranteed returns policy
(Kotler et al., 2009, pp. 3319-320).
The Nature of Services
A service is defined as: ‘any act or performance one party can offer to another that
is essentially intangible and does not result in the ownership of anything’. Services
are different from products and have a number of distinguishing characteristics that
Lecture 9 Products and Services; Prepared by Zaved Mannan 4 | P a g e
are critical in the marketing process. Services are intangible in that they cannot be
held or touched. This represents some unique challenges to marketers.
Features of Services
• They are intangible but can combine both tangible and intangible elements
(e.g. dinner (tangible) at an exclusive restaurant (intangible atmosphere,
• They are inseparable and are consumed at the same time they are produced.
You can’t have the consultation without the doctor and unlike a product you
can’t take it home for consumption later.
• They are perishable. Services can’t be stored. Friday nights unsold hotel
rooms can’t be sold later, they remain unsold on Friday night.
• They are variable (or heterogeneous) for example a visit to the dentist will be
a different experience for each person.
• They can be experiential (e.g. bungy Jumping).
• They can be delivered in real time (e.g. a message).
• They can be delivered face to face.
• They need to be taken on trust.
Due to the intrinsic nature of services (intangible, variable, inseparable, perishable)
there is often a high degree of risk involved in their purchase. Most people will
agree that a first visit to anew hairdresser or barber can be a high risk situation.
Other services such as legal advice, mortgage services are high involvement and
have high consequences if the service quality and reliability is poor. For this reason
consumers will often rely heavily on word of mouth over advertising in the
consumption of services. They also command a high degree of loyalty making it
difficult for companies to win customers from competition.
Categories of Service Mix
As mentioned, the distinction between products and services are becoming more
blurred. Service may be tied to physical products in the form of a value add or
simply customer service. Kotler et al. (2009, pp. 340-344) distinguish between five
types of offering:
• Pure tangible good
• Tangible good with accompanying service
• Hybrid-equal parts good and service
• Major service with accompanying minor goods and service
• Pure service
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Marketing Strategies and the Importance of Quality for Service Firms
Much of the relationship marketing approach that we have looked at in other
lectures arose out of the service industry. Because services are highly individual
and customized and rely heavily on trust, these firms understood the value of
developing strong relationships with their customers. Many service providers are
small firms (e.g. your local accountant, doctor, solicitor, hairdresser) and cannot
afford large scale marketing initiatives. Instead they rely on quality, reliability, trust
and a strong understanding of individual customers’ needs and wants.
Nevertheless, as Kotler et al. (2009, pp. 344-345) point out there are still many
firms which are not managing their services well. Customers generally expect that
the service provider delivers the basic requirements, is reliable and understands
their needs by listening to them. Good service requires good staff training,
empowered employees who can vary and adapt the service offerings to meet
customer needs and a clear companywide understanding of the firms’ commitment
to quality. Kotler et al. (2009, pp. 344-358) outline how firms can work actively to
identify gaps in their service delivery and discuss the best practices in service
More on Services
In most developed economies, the majority of employment occurs in the service
sector (as opposed to the agriculture or manufacturing sector). In Australia,
approximately 70% of the working population are employed in services. Marketing
of services is therefore a growing and important part of marketing.
c) New Product (and Service) Development
Challenges in New-Product Development
It is often stated that the development of new products determines the future
viability of an organization as new products represent the best way of sustaining
profit and revenue growth. However it should be appreciated that the development
of new products and services is both expensive and risky, although the financial
rewards can be high if successful. Kotler et al. (2009, p. 556) highlight the high
rate of failure of new products that fail to meet acceptable in the market place with
recent studies showing that 95% of new consumer products fail in the USA and
90% in Europe. Possible reasons for the high rate of failure include the following:
• Executive pushing a ‘favourite’ idea despite negative market research
• Market size overestimated.
• Poorly designed product.
• Product poorly positioned in the market, ineffective advertising or overpriced.
Lecture 9 Products and Services; Prepared by Zaved Mannan 6 | P a g e
• Product fails to gain sufficient distribution coverage and support.
• Development costs are too high.
• Competitor reactions to the new product are underestimated.
Effective Organizational Arrangements
Effective new product development requires active support from top management
combined with sufficient allocation of resources needed to support this activity and
a set of criteria to evaluate new product ideas. Organizations can use product
managers, new-product managers or cross-functional groups to handle
responsibility for new product ideas.
The New Product Development Process
The new product development process is generally characterised as consisting of
eight steps which we will look at briefly in Table 9.1 below.
Table 9.1: The new product development process.
1. Idea generation Use of various brainstorming activities as well as
speaking to customers, company staff, distributors
and the use of R&D and market intelligence.
2. Idea screening New ideas must be screened to determine provisionally.
How promising the ideas are. Criteria used to evaluate
i. Does the market care? (identify consumer benefits
and market potential)
ii. Is it important to the organization? (Does it fit our
strategy and goals? Will it create shareholder value?
How much market share could we get? How does it
provide us with a competitive advantage?)
iii. Does it fit with our capabilities?
Sound like need to be developed into product concepts
and the category concept prior to testing with the
appropriate target group.
Consists of three elements:
i. Analysis of the target market’s size, structure and
behaviour; the planned product positioning; and the
sales, market share and profit goals in the early
ii. The product’s planned price, distribution strategy
and marketing budget for the first year.
iii. The long run sales and profit goals and marketing-
mix strategy over time.
5.Business analysis This seeks to determine whether sales, cost and profit
projections for the proposed product satisfy company
objectives. Two key areas:
Lecture 9 Products and Services; Prepared by Zaved Mannan 7 | P a g e
i. Estimating sales-sum of three different types of
sales (first time, replacement, repeat) which must
return a satisfactory profit.
ii. Estimating costs and profits (See Table 20.6 on p.
585 for a detailed example)
At this stage the product requires a large increase in
investment as it continues to go through functional and
7.Market testing The product will go through a variety of testing; sales
ware search; simulated store technique; controlled test
marketing; test markets. Note that these were listed in
order from the least expensive to the most expensive.
8.Commercialization Assuming the product has made it thus far, management
can now decide whether to launch the product. Four key
iii. To whom
The Consumer Adoption Process
Given that we are interested in launching new products, then we need to have
some understanding of how consumers learn, try and eventually purchase new
products. In order to understand this, marketers have developed a theory of
diffusion of innovation that suggests that within target markets there exist early
adopters. Let us now examine briefly the adoption process:
Stages in the Adoption Process
Reading 9.1: Cooper, R. G. (1990). From experience: The invisible success factors in a product
innovation. Journal of Product Innovation. 16, 115-133.
This is an excellent article examining the issues that can lead to success in the marketplace.
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The idea is to move consumers through each of the five stages as fast as possible.
Figure 20.8 on p.579 will give you an understanding of how products are adopted
Factors Influencing the Adoption Process
Obviously the adoption process will not be identical for each individual. Various
factors may influence the adoption process such as:
Willingness to try new
Consumers will vary in their willingness to try new
products depending on how interested they are in
the particular product category. Your grandparents
are probably less interested buying an MP3 player
than you or your children are.
Personal influences Opinion leaders play a critical role here.
Characteristics of the
Main factors are the product’s relative advantage over
other products its compatibility with the target market;
its complexity, or ease of use; its divisibility, or degree
to which it can be tried; communicability, the degree to
which the benefits of the product can be communicated.
readiness to adopt
Marketers need to identify those organizations most
wiling to adopt the innovation early.
Products and services differ in their nature and characteristics. In marketing
products, marketers need to be aware of the various levels of the product as well as
the way they can be classified. Products can be differentiated on a number of
dimensions including from, feature, performance, conformance, durability,
reliability, reparability, style, design or service offerings.
Services differ from products in that they are intangible, inseparable and
perishable. Each of these characteristics presents challenges to marketers to
improve the experience, quality and reliability of the services. Service marketing
relies heavily on relationship and holistic marketing orientations which emphasise
both internal and external marketing.
Most firms recognize the necessity for and advantages of regularly developing new
products and services. Mature and declining products eventually must be replaces
with newer products. New product development strategy thus is one of the most
important activities for any frim in the contemporary marketplace. If the firm does
not make its own products obsolete, eventually someone else will and all firms
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should remember that a good idea might not be a good investment. New products
can fail, and the risks of innovation are as great as the rewards. The key to
successful innovation lies in developing better organizational arrangements for
handling new product ideas and developing sound research and decision procedures
at each stage of the new product development process.
Adjunct Faculty Member
University of liberty Arts Bangladesh (ULAB)